It’s amazing how long it can take ivnestors to see that the wheels are coming off a prized investment vehicle. Denail, after all, is a powerful thing.

But when an imperiled favorite happens to be a pol of asset-backed securities – especially those involving home mortgages – denial can be be compounded by outright blindness to the real risks of that investment. That may explain why, even as everyone concedes that the subprime or low-grade mortgage market has fallen into the sea, the vast pools of mortgage-backed securities built in part on those risky mortgage loans still appear to be on solid ground.

Growing numbers of the companies that make or invest in subprime mortgages are themselves facing financial distress, and some have shut their doors or filed for bankruptcy protection.

HSBC Holdings, Europe’s largest bank and a major subprime lender in this country, shocked Wall Street recently by announcing that home-loan delinquencies have gotten so bad that it has set aside $10.6 billion to cover potential losses.

Mortgage experts estimate that approximately $1.5 trillion worth of adjustable mortgages will reset by the end of 2007. Forecasts call for $600 billion to $700 billion of those loans to be refinanced into new loans, including fixed-rate mortgages.

Last year, ARMs represented 30 percent of all mortgages, according to the national Mortgage Brokers Association. By 2008, it estimates, the number will drop to 18 percent.

For years Matt resisted becoming a real estate agent preferring to be an executive at Redfin but he recently caved in the spring of 2014 and became an agent. If you're interested in working with Matt, drop him a line at matt@urbnlivn.com. You can also find Matt on Twitter or skiing.

EconE

What’s shakin’ Matt.

Stopped by…not sure if you wanted me posting anymore…but anyhow. I don’t play the market…especially when we are in a “hyper” speculative asset market bubble. The guy on the housing panic website has talked about shorting for well over a year…both builders and mortgage companies. He’s been right on with most of predictions but right now…all the good cherries have been picked so you are a little late to the party. I have had my eye on this bubble since 2003 and have been discussing it quite a bit…so I have prepped my investments accordingly.

I talked to my dad about a recent Economist Article that discusses who has been buying all of these sub-prime bonds. When he heard that some of the bigger banks (Chase/Deutschebank/Credit Suisse were into buying them…he said that there will be some banking system problems.

I guess I have too much time on my hands…hahaha. This is just the third large move that the Chinese government has made in the last few weeks in order to control their “asset” bubbles.

Sure…I could share what I know with people more…but honestly…I have sat back and watched out nation chase it’s tail into a speculative frenzy over real estate and it became nothing other than a bubble. Asset Market bubbles are nothing new…and the shiny condo’s are really just 21st century tulips. People saw a way to “get rich quick” by flipping condos and now…the game is up…There are going to be a TON of people that are going to get burned in this and it was the “easy money” loans where people were soooooo sure that 3,6, or 12 months later that all they had to do was sign their name a few times and they could get themselves a condo.

In the good old days…not so long ago…people bought houses…they weren’t “sold” houses…and they certainly didn’t line up at some developers project begging to buy a condo (ummm…lotteries?…DUH!!!)…not only that…they bought them in order to sell them.

Suuuuuuure….they say that only X% will be sold to investors but in the days of Stated Income no doc loans and crazy arms…not to mention “liar” loans…would it surprise you that many of these “purchase to live in people” were actually investors and just lied about it? Please…do not underestimate human greed.

Because I lived in Seattle before and will sooner or later return I have followed the market like a HAWK…and I too…like you concentrate on the Downtown condo market primarily and other “secret spots”. I check the MLS daily…not just the new listings…but scroll through all the things that had caught my eye to see what is selling. Sometimes the dissappear…but usually…they come back. I can see which condo developers are playing games and what is and isn’t selling.

40 units either for sale or rent at 2200 building currentlyand Paul just announced the groundbreaking on some new project..financing through…Countryside. Add to that all the other units that are coming on the market with people that may have financed on one of those ARMs and then end up taking it in the shorts when they can’t find a renter to cover their carrying costs and cant refi in a couple years when lending standards are EVEN TIGHTER.

Bernanke in My opinion is buying time holding rates steady…but in all reality…it needs to end…the longer a bubble is perpetuated…especially when you consider where and how the money gets there…the worse the outfall is…it really hasn’t been much different throughout history. Bulls Make money Bears Make money…Hogs Get Slaughtered. And don’t forget to never reach for a falling knife. I like the condos up there as much as you do…maybe even more…but now is not the time to buy.

And..One quick question…Where’s that condo on the MLS? The one above. I didn’t see it on Urban Living Seattle and when Realtor.com the Ohhhh so transparent MLS listing site of the National Association of realtors has about 60% of what the other sites have (no…Morford doesn’t have old inventory up that has already sold)…I’ll bet that it doesn’t go STI very fast unless it is one of those bogus STI’s that I have heard about from people in the industry…hell…even if it is…who cares…no faking will get anybody out of this market faster right now…I’m not even going to mention how low it will go but hang tight for a couple years…and you’ll see what I mean. This is gonna shake the economy more than you think…not just housing.

People are going to hurt…but they brought it on themselves…no one NEEDED more than one domicile. There is going to be lots of personal financial ruin and the government won’t bail people out…they’ll bail the banking system out first because frankly…in their mind…anybody who lost in a condo investment deserved it…they should have kept their eyes open and had a better understanding of basic economics before they stepped up to the plate.

EconE

Oh…yeah…and what are all those people going to do when they can’t refinance their ARM…can’t afford the upped payments…and have to sell when there are more and more resetting every day.

He who is the proudest…he who holds out the longest…may end up being the one that gets hurt the most.

And…one last little bit of food for thought…if a building is full of these types of ARM investors…it may start as a nice building…but the financials will be wobbly from the getgo if it doesn’t have enough owners that can afford the dues when their payments adjust up…or if it just doesn’t have enough owners. I have a feeling that there are more people than we know that are holding on to an “extra” condo that is showing up as an “occupied” unit in government stats.

EconE

Oh…yeah…and what are all those people going to do when they can’t refinance their ARM…can’t afford the upped payments…and have to sell when there are more and more resetting every day.

He who is the proudest…he who holds out the longest…may end up being the one that gets hurt the most.

And…one last little bit of food for thought…if a building is full of these types of ARM investors…it may start as a nice building…but the financials will be wobbly from the getgo if it doesn’t have enough owners that can afford the dues when their payments adjust up…or if it just doesn’t have enough owners. I have a feeling that there are more people than we know that are holding on to an “extra” condo that is showing up as an “occupied” unit in government stats.

EconE

Great essay…They should simplify it because most people would understand that less than all the freaky mortgages.

interesting thing to point out however…this is something that made me go hmmmmm.

from the essay Part 1A.

A. Fundamental Changes in Origination and Servicing

“Reductions in down-payment requirements, relaxed underwriting standards,
the movement to automated valuation and underwriting systems, and the ability
of lenders to move loans off of their balance sheet into the capital markets
decoupled the traditional links between regional economics and housing market
performance. Similarly, an industry effort to mitigate bad loans, rather than
having them pre-pay or foreclose, has altered the historic relationship between
default and foreclosure rates. Although these changes posed minimal increases in
risk during a rapidly appreciating and low-interest-rate housing environment,
their risks may materialize under an environment with stagnant valuations and
increasing interest rates.”

then…at the end of the essay…referring back to the above…

“The structural changes noted in Part I.A largely went unnoticed by
MBS investors until only recently.”

WTF? Don’t these guys know math…are they saying that they had never heard of a neg-am product until JUST RECENTLY. These guys invest in these things and they don’t even read the label? I dunno…questionable in my opinion.

“We explain that those changes went unnoticed
largely because of the existing complexity and valuation difficulties underlying
todays MBS markets.”

C’mon you guys (answering to the essay authors)…that was a great essay but really…when are you economists just going to come out and tell people what’s up…real simply.

Speculatory asset bubble that is going to pop and we…well…lots of us…are going to be F’d…even some that “think” they are secure.

It’s about time for another depression…dont you think?

It’ll be televised…and someone will make a ton of money off of it. It’s just the way things work.

Money…it’s a strange and elusive thing…Economics…even moreso.

Economically speaking…we are pretty much in uncharted waters…and not those that have nice lush tropical islands.

I only wish I could have been at the recent G7 finance ministers meeting to see what China had to say…interesting that they were an invited guest…I’ll bet Putin was pissed though…lol.

I also noticed you are from Canada…

What else did you expect from us greedy Americans…economic prudence and financial responsibility? HA!

EconE

Great essay…They should simplify it because most people would understand that less than all the freaky mortgages.

interesting thing to point out however…this is something that made me go hmmmmm.

from the essay Part 1A.

A. Fundamental Changes in Origination and Servicing

“Reductions in down-payment requirements, relaxed underwriting standards,
the movement to automated valuation and underwriting systems, and the ability
of lenders to move loans off of their balance sheet into the capital markets
decoupled the traditional links between regional economics and housing market
performance. Similarly, an industry effort to mitigate bad loans, rather than
having them pre-pay or foreclose, has altered the historic relationship between
default and foreclosure rates. Although these changes posed minimal increases in
risk during a rapidly appreciating and low-interest-rate housing environment,
their risks may materialize under an environment with stagnant valuations and
increasing interest rates.”

then…at the end of the essay…referring back to the above…

“The structural changes noted in Part I.A largely went unnoticed by
MBS investors until only recently.”

WTF? Don’t these guys know math…are they saying that they had never heard of a neg-am product until JUST RECENTLY. These guys invest in these things and they don’t even read the label? I dunno…questionable in my opinion.

“We explain that those changes went unnoticed
largely because of the existing complexity and valuation difficulties underlying
today’s MBS markets.”

C’mon you guys (answering to the essay authors)…that was a great essay but really…when are you economists just going to come out and tell people what’s up…real simply.

Speculatory asset bubble that is going to pop and we…well…lots of us…are going to be F’d…even some that “think” they are secure.

It’s about time for another depression…dont you think?

It’ll be televised…and someone will make a ton of money off of it. It’s just the way things work.

Money…it’s a strange and elusive thing…Economics…even moreso.

Economically speaking…we are pretty much in uncharted waters…and not those that have nice lush tropical islands.

I only wish I could have been at the recent G7 finance ministers meeting to see what China had to say…interesting that they were an invited guest…I’ll bet Putin was pissed though…lol.

I also noticed you are from Canada…

What else did you expect from us greedy Americans…economic prudence and financial responsibility? HA!

jo

someone have cliff notes on all that?

jo

someone have cliff notes on all that?

EconE

sorry jo…Cliff notes are only for people that want to “work the system” rather than actually learn something.

EconE

sorry jo…Cliff notes are only for people that want to “work the system” rather than actually learn something.

EconE

If you don’t mind Matt…I’d like to nominate this as kind of the economic information section…I’ll post articles that are of potential economic interest.

This latest article dicusses the upcoming meeting of the OPEC ministers.

Another good one from Bloomberg Feb 15th…not todays news…but by no means stale.

This article explains how subprime backed bonds are being downgraded…soon…they’ll just be junk bonds. One problem is if it hits the prime market where people did cash out refis because that is an economic no no and really isn’t financially prudent.

so…for your reading pleasure…well…it might be displeasureful for some but it’s better to know what is happening out there.

The subprime collapse will be yet another reason why inventory is going to rise in 2007. Not only are more and more people priced out of the market, the people that shouldn’t have been in the market in the first place are also now priced out.

Matthew

The subprime collapse will be yet another reason why inventory is going to rise in 2007. Not only are more and more people priced out of the market, the people that shouldn’t have been in the market in the first place are also now priced out.

EconE

The subprime collapse is just one of many reason…and is just the beginning.

who knows…in a few years…Matt may have actually appreciated some of the posts I have made here…or he may just be really pissed that he didn’t take the time to actually read and discuss…

Or everything will just be fine and no one should have anything to worry about.